BUSINESSEUROPE Reform Barometer 2025 – EU in a new political cycle: Competitiveness as a true priority in a complex global context

Executive summary

European Union enterprises, the backbone of the EU economy and social cohesion, are facing intense competition from other regions worldwide. In recent years, the United States has demonstrated significantly stronger economic growth. The U.S. GDP, which was 23% higher than that of the EU in 2008, had surged to 42% higher by 2023 (in nominal terms). Moreover, in the last quarter of 2024, the U.S. recorded an annual GDP growth rate of 2.5%, compared to just 1.1% in the EU. The best way to address the EU’s growing economic underperformance is to lighten the regulatory burden faced by EU companies and improve Europe’s investment climate, as we highlight throughout this report and as forcefully expressed in our members’ survey.

COMPARISON WITH U.S. AND CHINA

Political change has heightened the urgency for the EU to strengthen its economic competitiveness vis-à-vis the U.S. and China. A key concern is productivity, where the EU lags behind the U.S., with the gap widening over the past decade. Meanwhile, China is becoming more competitive in strategic industries and global supply chains.

The European economy is also falling behind in foreign direct investments (FDIs), as the U.S. remains the top investment destination, while EU inflows have been declining, and China’s have remained stable through the years. To attract capital, the EU must create a more investment-friendly environment, reducing regulatory burden and completing the Single Market, for instance, through the effective implementation of its Capital Markets Union (CMU).

Energy costs further undermine EU’s competitiveness, with industrial electricity prices up to almost 3 times higher than in the U.S. or China in 2024. Overall costs linked with the working of the electric system and the lack of market integration have exacerbated the issue. Addressing these challenges is crucial as need for cheaper electricity will only increase with the twin sustainable and digital transitions. Additionally, Europe’s demographic trends, particularly its ageing population and rising old-age dependency ratio, intensify the need for higher productivity to sustain pensions, healthcare, and increasing defence spending.

REDUCING REGULATORY BURDEN

Excessive regulation is stifling EU businesses, as highlighted in our members’ survey. As mentioned in the Draghi report, in the period between 2019 and the first half of 2024, the EU enacted approximately 13,000 laws, far more than the roughly 3,000 in the U.S., contributing to the productivity gap and stagnant intra-EU trade (20% of GDP vs. 70% in the U.S.). Over 60% of EU companies see excessive regulation as an investment barrier. While the European Commission’s target of a 25% reduction in reporting obligations (35% for SMEs), is a step in the right direction, a tangible decrease in the overall regulatory burden, leading to lower compliance costs and a streamlined framework, is crucial to truly boost EU competitiveness.

REFORMING THE EU BUDGET

The European Commission’s February 2025 Communication outlines key challenges for the next Multiannual Financial Framework (MFF), including budget financing, debt repayment, and the investment needs in strategic sectors. Reports by Letta and Draghi highlight the necessity for a robust but more flexible and investment-driven budget to sustain competitiveness, green and digital transitions, and defence exigences. However, the rigid MFF structure limits effectiveness. BusinessEurope calls for streamlining programs, reallocating unused funds, reducing bureaucratic complexity, and incentivising private investments.

CREATING A SAVINGS AND INVESTMENT UNION

The Savings and Investment Union project seeks to revive and integrate the Capital Markets and Banking Unions to finance EU priorities like defence and the green and digital transitions, while enhancing the competitiveness of the European economy. BusinessEurope supports the initiative, emphasising the need to mobilise private savings and improve equity financing for innovative companies. EU capital markets remain fragmented, with lower equity investment and liquidity than the U.S., where they are deeper and more dynamic. Institutional investors, including pension funds and insurers, are expected to play a bigger role in financing EU growth. Finally, addressing the low availability of venture capital and the lasting presence of regulatory barriers is key to improving EU competitiveness and boosting investment opportunities.

MEMBERS FEDERATIONS SURVEY

European businesses began the second mandate of President Ursula von der Leyen’s European Commission with high expectations, anticipating policy shifts. While the focus on competitiveness and simplification is encouraging, swift implementation and tangible results are crucial to translate promises into reality.
However, there is growing concern over the EU’s declining attractiveness as an investment destination. Over half of respondents reported a deteriorating investment environment, hindering the EU’s competitiveness against international peers. The regulatory environment is identified as the primary challenge to EU investment, followed by high energy prices, and skilled labour shortages.

The deregulation under the new U.S. administration is expected to exacerbate this, with over 85% of respondents predicting a negative impact on EU investments. Furthermore, European businesses express significant dissatisfaction with the implementation of the Recovery and Resilience Plans (RRPs), with only 10% satisfied. Slow decision-making, bureaucracy, a lack of private sector engagement have been identified as key obstacles.